Memorandum March 1, 2018 TO: THRU: FROM: SUBJ: Chris Cummings, Assistant Director, Economic Development Ed Tabor, Programs & Incentives Manager Shanna Bailey, Regional Project Manager Dennis Knight, Finance Officer Funding Opportunity of $ 7,229,000 Safe Drinking Water Revolving Loan Program for City of Hines, Hines Water System Improvements, No. #180-13191 Please accept this memorandum for the Oregon Infrastructure Finance Authority (IFA) for funding assistance. Business Oregon s (statutorily and by rule referred to as Oregon Business Development Department) staff administers the IFA. This memorandum will provide an application review, findings and analysis, and staff s recommendation for requested action. There may also be post approval follow-up instructions for staff. Background Applicant: City of Hines located in Harney County. The city has a 2016 certified population of 1,560. The city is considered both rural and distressed Funding Request: Loan & Principal Forgiveness Project Type: Planning (technical) Design Construction Project Background: The city has identified water system improvements to meet current and long-term needs. A 2017 Water System Master Plan (WSMP) evaluated the system and recommended improvements for water supply, storage, and distribution to meet fire flow requirements, increase storage capacity, and update aging distribution elements. Both the city s existing water storage reservoirs are in poor condition and should be replaced. The distribution system is largely made up of original 2-inch steel lines installed with the original system in the early 1930s. The project includes preliminary and final engineering as well as construction of the selected improvements described in the WSMP. The proposed solution includes improvements to the city's supply, storage, and distribution systems. Selected improvements are outlined in the state-approved WSMP with Oregon Health Authority.
Project Description: The city will procure an engineer licensed in the state of Oregon to complete preliminary and final design and construction for this project. Supply improvements include replacing the Wells No. 2 and 3, well pump motors and pump station buildings, installing well transducers, providing a backup generator and security fencing at Well No. 3, and improving electrical, controls, and telemetry. Water storage improvements include removing an existing elevated reservoir, constructing a new 800,000-gallon reservoir, and making improvements to the existing bolted steel reservoir. Water distribution improvements include new lines that provide enhanced looping, circulation capabilities, and replace undersized main lines, as well as improvements that will provide adequate fire flows. Work Plan: The work will be completed in two phases, design and construction. The attached Work Plan Table on page 7 below includes the project activities and the anticipated completion dates. Public Involvement Statement: The city has held several public meetings discussing this project throughout the planning stages over the last two years. Findings and Analysis This project helps implement the following goals and objectives of providing funding to municipalities for publicly-owned facilities that support economic and community development in Oregon: - Safe Drinking Water Revolving Loan Fund: to provide public water systems financing for planning, design, and construction projects that protect public health, ensure compliance with federal and state requirements, respond to an emergency, or generally improve water infrastructure resiliency (ORS 285A.213 and OAR 123-049). - Statewide planning goals #6 Air, water and land resources quality, #9 economic development, and #11 public facilities and services. Program Findings & Compliance 1. City of Hines is an eligible applicant as defined in ORS 198.010. 2. This is not a compliance driven project. 3. Project priority is high. SD-17-174 was rated (15 points) and ranked (18 th ) by Oregon Health Authority and the project is classified as a Health, Compliance, Consolidation Project. 4. A desktop and a standard on-site monitoring procedure is suggested for the project. 5. Pre-agreement Costs have been authorized, with no guarantee of reimbursement. Costs include: Preliminary Design and Construction Engineering $200,000; Environmental Assessment $30,000; Cultural Resources Report $50,000; and Legal Fees $15,000. Invoices incurred before funding may be requested, for these budget line-items, for no more than $295,000. 6. This project is found to be compliant with applicable department policies, rules and statutes. City of Hines Board Staff Recommendation Page 2 of 11
Financial Findings & Compliance Repayment source The table below shows historic revenue from the Applicant s Water and Sewer Fund for the last three audited fiscal years ending June 30, 2017 and fiscal year end 2018 budget. The revenues and expenses were broken down within the Fund and only the water portion is listed below. Enterprise Fund City of Hines Performance Review audited audited audited budgeted FY Ending June 30th 2015 2016 2017 2018 Beginning Fund Balance 1,072,456 1,093,452 1,165,869 1,245,500 Revenues no data no data no data no data Charges for Services 193,570 271,450 298,729 311,271 Other Operating Revenues 8,513 1,873 9,108 9,400 Operating Revenues 202,083 273,323 307,837 320,671 Interest and Miscellaneous 1,106 423 1,500 2,000 Grant 0 0 0 20,000 Total Non-Operating Revenues 1,106 423 1,500 22,000 Total Revenues 203,189 273,746 309,337 342,671 Expenditures no data no data no data no data Personal Services 84,300 97,358 85,696 85,316 Materials & Services 101,177 87,455 79,453 88,031 Total Operating Expenses 185,477 184,813 165,149 173,347 Net Operating Income 16,606 88,510 142,688 147,324 Capital Outlay 0 0 48,041 108,207 Debt Service 16,516 16,516 16,516 18,813 Total Expenses 201,993 201,329 229,706 300,367 Net Revenues 1,196 72,417 79,631 42,304 Net Transfers/Adjustments 19,800 0 0 50,000 Ending Fund Balance 1,093,452 1,165,869 1,245,500 1,337,804 In September of 2015 the city raised water rates which is reflected in the, almost 40%, increase in revenues in fiscal year end 2016. Expenses have been well managed resulting in improved net revenues in the past couple of years. General Fund Summary The table on the following page shows a performance review of the Applicant s General Fund for the last three audited fiscal years ending June 30, 2017, and fiscal year end 2018 budget. City of Hines Board Staff Recommendation Page 3 of 11
General Fund City of Hines Performance Review audited audited audited budgeted FY Ending June 30th 2015 2016 2017 2018 Beginning Fund Balance 174,116 147,979 198,786 219,697 Revenues no data no data no data no data Property Taxes 327,951 322,024 338,285 345,300 Other Operating Revenues 233,227 296,398 274,109 284,890 Operating Revenues 561,178 618,422 612,394 630,190 Interest and Miscellaneous 9,626 40,005 5,645 5,100 Intergovernmental & Grants 82,923 50,027 90,343 83,253 Total Non-Operating Revenues 92,549 90,032 95,988 88,353 Total Revenues 653,727 708,454 708,382 718,543 Expenditures no data no data no data no data Personal Services 459,907 419,647 410,648 471,957 Materials & Services 193,285 197,319 217,127 239,264 Total Operating Expenses 653,192 616,966 627,775 711,221 Net Operating Income (92,014) 1,456 (15,381) (81,031) Capital Outlay 18,672 0 42,606 83,637 Debt Service 0 11,781 13,090 13,100 Total Expenses 671,864 628,747 683,471 807,958 Net Revenues (18,137) 79,707 24,911 (89,415) Net Transfers/Adjustments (8,000) (28,900) (4,000) (35,000) Ending Fund Balance 147,979 198,786 219,697 95,282 Debt service analysis Net Revenues for Debt Coverage: The attached table reflects the Projected Net Revenues for the Applicant s Water Fund only as provided with the Applicant s application. It reflects more than adequate net revenues necessary to provide the required 1.20 debt service coverage ratio. City of Hines Board Staff Recommendation Page 4 of 11
Summary of Revenues, Expenditures, and Debt Service Coverage City of Hines PRO FORMA Current FY Projected Year (ending June 30th) 2018 2019 2020 2021 2022 2023 Beginning Fund Balance 1,283,000 1,353,304 1,460,635 1,627,254 1,790,008 1,827,003 Operating Revenues no data no data no data no data no data no data Primary Revenue Source 320,671 326,000 391,000 454,000 497,000 509,850 Total Operating Revenues 320,671 326,000 391,000 454,000 497,000 509,850 Operating Expenses Personal Services 85,316 100,278 103,287 106,385 109,577 112,864 Materials & Services 88,031 90,078 92,781 95,564 98,431 101,384 Total Operating Expenses 173,347 190,356 196,068 201,949 208,008 214,248 Debt Service Funds Avail for Debt Coverage 147,324 135,644 194,932 252,051 288,992 295,602 US Bank 1/2 pmt 16,516 16,516 16,516 OBDD V15017 1/2 pmt 2,297 2,297 2,297 2,297 2,297 2,297 IFA Proposed Loan 0 0 0 77,500 240,200 240,200 Total Debt Service 18,813 18,813 18,813 79,797 242,497 242,497 Debt Service Coverage Ratio 7.83 7.21 10.36 3.16 1.19 1.22 Other Activities Cash Avail After Debt Service 128,511 116,831 176,119 172,254 46,495 53,105 Loan Proceeds / Drawdowns 2,160,000 5,039,000 Capital Outlay (OUT) (108,207) (2,168,000) (5,047,000) (8,000) (8,000) (8,000) System Replacement Reserves (1,500) (1,500) (1,500) (1,500) (1,500) Net Other Activity (108,207) (9,500) (9,500) (9,500) (9,500) (9,500) Net Transfers IN (OUT) 50,000 Net Transfers & Adjustments 50,000 0 0 0 0 0 Ending Fund Balance 1,353,304 1,460,635 1,627,254 1,790,008 1,827,003 1,870,608 Avg. Rev's per EDU (calc) $36.46 $37.06 $44.45 $51.61 $56.50 $57.96 EDU's (app) 733 733 733 733 733 733 Connections (app) 696 696 696 696 696 696 *Under the debt payments, the ½ pmt refers to half of the payment coming from the water operation and half of the payments coming from the sewer operation. City of Hines Board Staff Recommendation Page 5 of 11
Existing obligations and risks The table on the following page reflects the applicant s debt service requirements as of their last audit. Summary of Outstanding Debt Obligations City of Hines Loan Source June 30, 2017 Balance Annual Debt Service Payment Source Maturity Net Direct Debt no data no data no data no data US Bank, Capital Lease $13,091 $13,091 General Fund 2018 Net Direct Debt $13,091 $13,091 no data no data Self-Supporting Debt no data no data no data no data US Bank $93,198 $33,033 Water/Sewer Fund 2020 OBDD W/W V15017 $30,000 $4,593 Water/Sewer Fund 2024 DEQ $871,543 $111,176 Sewer Fund 2027 Self-Supporting Debt $994,741 $148,802 data data Gross Bonded Debt $1,007,832 $161,893 data data The Business Oregon and US Bank loans are both water/sewer pledged loans. The US Bank loan was a prior Business Oregon loan but was refinanced in August 2012 and is in a prior position to the Business Oregon loans. All Business Oregon loans have been paid as agreed. Underwriting standards The Applicant meets 15 of the 20 applicable indicators in the attached Financial Summary. The following indicators are not met: Unemployment Rate as a Percentage of State Avg. [111.36% is not < 110% standard] Population Growth Rate since 2000. [-0.22% is not > 0% standard] Assessed Value Annual Growth Rate since 2000. [2.38% is not > 3% standard] Accounts Receivable (3 yr. avg.) [17.84% is not < 15% standard] Number of Connections. [696 is not > 1,500 standard] Applicant s bond rating No bond rating available. Financial statement of program SDWRLF as of February 18, 2018. 1. Available funds $41,968,093 2. Remaining balance, if the project is approved, is $34,739,093 3. Disbursements will begin approximately 6 months after contract execution. Project Repayment Phase Loan Summary Type Award Amount Grant Amount Total Loan Amount Interest Rate* Amortized [in years] Est. Annual Payment* SDWRLF $ 7,229,000 $1,030,000 $6,199,000 1.0% 30 $240,200 Total $7,229,000 $1,030,000 $6,199,000 no data no data $240,200 *Payment rounded to nearest $100. City of Hines Board Staff Recommendation Page 6 of 11
Funding Recommendation Budget Line Items SDWRLF Totals Preliminary, Design and Construction Engineering $ 1,035,000 $ 1,035,000 Construction Storage $ 1,753,000 $ 1,753,000 Construction Distribution Lines $ 2,801,000 $ 2,801,000 Construction Pump Stations $ 819,000 $ 819,000 Construction Contingency $ 471,000 $ 471,000 Easements $ 60,000 $ 60,000 Environmental Assessment $ 30,000 $ 30,000 Cultural Resource Report(s) and Monitoring $ 150,000 $ 150,000 Legal Fees $ 50,000 $ 50,000 Project Administration $ 15,000 $ 15,000 Labor Standards $ 15,000 $ 15,000 Permitting (1200-C, ODOT, County, etc.) $ 15,000 $ 15,000 Reporting and Regulatory Fees $ 15,000 $ 15,000 Total $ 7,229,000 $ 7,229,000 Proposed Work Plan Activity Begin Final Design June 2018 Final Design Complete, including OHA approval of plans March 2019 Permitting, Environmental, and Cultural Resources Reports completed March 2019 Bid and Award Construction Contract May 2019 Completion of Construction of Water System Improvements October 2020 Project completion December 2020 City of Hines Board Staff Recommendation Page 7 of 11
Source of Funds (For Business Oregon funds indicate Loan/Grant/Principal Forgiveness, Bond, Private or Public, and Taxable or Tax Exempt) Source of Business Oregon Funds Amount Safe Drinking Water Revolving Loan Fund Loan (Public Tax Exempt) $6,199,000 Safe Drinking Water Revolving Loan Fund Forgivable Loan $1,000,000 Safe Drinking Water Revolving Loan Fund Forgivable Loan (Labor Standards) Safe Drinking Water Revolving Loan Fund Forgivable Loan (Project Management) $ 15,000 $ 15,000 Total Business Oregon Funds $7,299,000 Source of Other Funds (For other state funds, indicate loan/grant, etc.) None $0 Total Other Funds $0 Staff s Recommendation Applicants under the SDWRLF program may be determined to be a Disadvantaged Community and qualify for grants/forgivable loan, reduced interest rate and an extended repayment term. A Disadvantaged Community is determined by the following criteria: 1. A community s Median Household Income ( MHI ) is less than the State s MHI of $51,243 and, 2. The community s Affordability Rate (MHI X 1.25% / 12) is lower than the actual monthly water rate per Equivalent Dwelling Unit ( EDU ). An EDU is one residential connection or up to the equivalent of 7500 gallons of usage, whichever is less. The city of Hines qualifies as a Disadvantaged Community due to their projected user rate of $56.50 by completion date and their MHI of $38,587 being below the state average and their affordability rate, which is $40.19. Financing is awarded in the amount of $7,229,000, which is to be distributed as follows: $6,199,000 SDWRLF Loan; 30 year term loan at a 1.0% interest rate. (The present value of the subsidy rate when compared to the short term treasury rate of 1.85% is $706,752 for the 30 year term.) $1,030,000 SDWRLF Forgivable Loan o $250,000 All eligible projects up to 10% of Total Award not to exceed $250,000, additionally o $250,000 For a Health and Compliance project up to 20% of Total Award not to exceed $250,000, additionally o $500,000 All Disadvantaged Communities are eligible for up to 50% of Total Award not to exceed $500,000, additionally o $15,000 Labor Standards Compliance o $15,000 Project Management City of Hines Board Staff Recommendation Page 8 of 11
The proposed loan will be structured in two phases. The first phase (Construction Phase) will accrue interest on actual funds disbursed, estimated first disbursement will be in June 2018. All accrued interest during the construction phase (estimated to be $77,500) will be due prior to or with the first principal and interest payment. The interest rate will be set at 1.0% for this phase. Construction is scheduled for completion by October 2020. The second phase (Repayment Phase) will begin with constant annual payments of principal and interest sufficient to repay the outstanding principal balance, together with interest, within a 30 year period. The estimated first principal and interest payment due date is December 1, 2021. The loan can be prepaid in part or in full without penalty. The interest rate will be set at 1.0% for the repayment phase. The Repayment Phase Loan Summary table summarizes the repayment phase of the proposed financing. Funding Recommendation and Conditions of Award Conditions: Based upon the following analysis, the award recommended above should be subject to the following conditions: A. Full Faith and Credit Pledge. The Recipient will be required to pledge its full faith and credit and taxing power within the limitations of Article XI, Sections 11 and 11 b, of the Oregon Constitution to pay the amounts due under the Financing Contract. The Financing Contract shall be payable from all legally available funds of the Recipient. B. Pledge of Net Revenues as Source of Repayment. The Recipient will be required to grant to the state a security interest in and irrevocably pledge its Net Revenues of the Recipient s Water Revenues to pay all of the obligations owed by the Recipient to the state under the Financing Contract. C. Financial Covenants. The Recipient shall charge rates and fees in connection with the operation of the Water System which, when combined with other gross revenues, are adequate to generate Net Revenues each fiscal year at least equal to one hundred twenty (120%) percent of the annual debt service due in the fiscal year on the Loan, any outstanding senior lien obligations, and any outstanding Parity Obligations. D. Affordability Rate. If, at the Project Completion, the average monthly residential water rates for the water supplied by the Water System are not at or above the affordability rate of $40.19 per 7,500 gallons, the amount due under the Forgivable Loan will not be forgiven. Further, the Financing Contract shall, at IFA s discretion and after notice to Recipient, be modified as follows: 1. Interest shall accrue at the rate of Two and Seventy Four/100ths percent (2.74%) per annum. 2. The annual payments shall be adjusted to an amount to fully amortize the then outstanding balance of each Loan by the 19th anniversary of the Repayment Commencement, on which date any amounts outstanding under each Loan shall be due and payable in full. City of Hines Board Staff Recommendation Page 9 of 11
E. Parity. The standard contract language default is No Parity or Senior Debt. F. Water Rights. Prior to disbursement of funds for construction activities the Recipient shall deliver documentation satisfactory to Business Oregon demonstrating that the Recipient is working with the Oregon Water Resources Department to pursue inclusion of Wells No. 1, 2, and 3 as additional points of appropriation to groundwater right G-13686. G. Additional approvals prior to contract execution. This will remain a conditional approval until the Drinking Water Advisory Committee has reviewed and provided written approval. This financial review is the financial portion of the Capacity Assessment. The Technical and Managerial portions of the assessment are included in a separate document. Instructions: None List of Attachments 1. Financial Summary Recommend Approval: Regional Project Manager Public Finance Officer Regional Development Officer Program Policy Coordinator Budget recommends that this award come from: Program Funds Senior Finance Accountant (Budget) RECOMMENDATION: We respectfully request your recommendation on the subject application. X Recommend approval of the project as submitted Recommend approval of the project with the following modifications: Programs & Incentives Manager City of Hines Board Staff Recommendation Page 10 of 11
APPROVAL: We respectfully request your approval on the subject application. X Recommend approval of the project as submitted Recommend approval of the project with the following modifications: Chris Cummings, Assistant Director, Economic Development The IFA Board shall consider loans over $3,000,000, grants over $500,000 and Safe Drinking Water forgivable loans over $750,000 for approval. The Drinking Water Advisory Committee shall consider Safe Drinking Water projects over $6,000,000. This project exceeds the regular approval dollar amount. Infrastructure Finance Authority Board has discussed the proposed project and has concluded to approve the award. Chris Cummings, Assistant Director, Economic Development Board Meeting City of Hines Board Staff Recommendation Page 11 of 11